Spreadbetting can seriously damage your wealth!

[absmith1]

I've been asked why I am sceptical about having a spreadbetting account. It's to do with money management and the limits on your bet size. My first concern is that spreadbetting, especially with small account sizes, can often limit the number of trades you can take. Here is an example:

You have a £5,000 account and only want to risk 1%, so you limit each loss to £50.

It's the 27/8/03 and you want to buy Astrazeneca at £24.65, your stop is below the recent low at £23.95 - this is a 70p difference. With a spredbetting account minimum bet is £1/p - thus your risk is £70. You can not place the trade. With a share or CFD account you can buy 71 shares (£50/70p).

This loss of trading is a lot worse for Index and USA stocks due the £/points ratio.

Lets say you have some more money in your account - £10,000. Your risk is now £100. You can place your bet at £1/p and buy 142 shares. Things move in your direction and on the 10/9/03 you sell at £26.98. The bet yields £233 and the share purchase £330.86 - a whopping 40% difference. This difference differs with the size of your account, the bigger the account the smaller the difference but for small accounts it is significant.

What do you think of this, is this a reasoned argument for Shares/CFDs or does CGT blow CFDs out of the window.

Andrew

 

[FTSE Beater]

Hi Andrew

I personally believe it comes down to what your trying to do and what your expectations are.

Trading UK FTSE 100 stocks is fine. The spreads are exact and you can trade with little slippage (if any).
If your trying to day-trade US Stocks or indicies, then your doing something that spreadbetting weren't designed for. Generally speaking, US Stocks and indicies move too fast for the spreadbetters to get a good fill, so you get a poor fill. (They won't offer a price that they can't get filled at, because that is throwing their money away).

With regards your point about Astrazenaca. If you can't place a stop within your set money management rules, then don't trade it. If I was in that situation, then I would eliminate AZN from my trading list and stick to stocks under 2000.

It also depends on your expectations. If you have a £5k account, then to make £500 a month is a good return. That's 10% a month
Say you look to do that.

£500 a month = £125 a week
£125 a week = £25 a day.

All of a sudden making 10% return a month doesn't sound so hard. I doubt any bank is offering a return of 10% a year, let alone a month.
I suppose what I'm trying to say is that spreadbetting is ok, if your careful, trade UK stocks or trade US stocks and indices by swing trading and manage your expectations well

Just my thoughts

 

[cd173]

Hi FTSEBeater

I'm curious about your comment regarding US stocks getting filled with SB. I play the US stocks with D4F on and off and generally don't have a problem getting filled at the price I requested.

Are there some problems I should be aware of?

Cheers

 

[barjon]

abs

I think you're being a tad unfair.

In your last example buying 142 shares is equivalent to betting
£1.42 per point (with the shares, for every point AZN rises you
gain 142 x 1p). Thus the yields are similar and different only by
the difference in spread on offer.

 

[absmith1]

In your last example buying 142 shares is equivalent to betting
£1.42 per point (with the shares, for every point AZN rises you
gain 142 x 1p). Thus the yields are similar and different only by
the difference in spread on offer.

But a lot of spread betting companies only offer bet sizes of £1, thus in this case you can only place a £1 or £2 bet. £2 takes you over your money management limit.

Andrew

 

[Gordon Gekko]

Being undercapitalised is another reason why newcomers find this game so tough. Especially with the betting limits in place. I honestly think if you don't have at least £50k in your betting account then this game isn't for you. Sorry.

 

[barjon]

Andrew,

maybe - but, whatever the total loss you're willing to bear, your
downside risk is £1.42 per point with the shares and £1 per point
with the bet. You could hardly expect to risk less per point with
the bet and yet expect an equivalent yield if the move is in your
favour.

good trading

jon

 

[FTSE Beater]

Hi FTSEBeater

I'm curious about your comment regarding US stocks getting filled with SB. I play the US stocks with D4F on and off and generally don't have a problem getting filled at the price I requested.

Are there some problems I should be aware of?

Cheers

Hi CD173

They must have improved the software then
The only thing to be wary of is trading thin volume stocks, as the price will get thrown around a lot. You shouldn't have any problems with the big ones though

<hr>
Hi Gordon Gekko

Why do you say £50k to trade. I know quite a few good traders who don't have anywhere near that amount and still make a very good living. With £10k making 10% a month, you would return over £31k a year. Now I think that is a good living

 

[frugi]

FTSEBeater,

Surely you'd have to return 25% a month from £10k to make £30k a year (assuming no compounding)?

 

[timsk]

Hi Gordon - or do you prefer Mr. Douglas?
Well, as a banker from the big apple, doubtless $50K is just loose change for you, but for many of us on this BB, it's wealth we will only ever get through trading. Starting, needless to say, with a much smaller pot. I have no idea but, if I had to make a guess, I'd say that 90% of traders on this board start with 10% of your figure - or less. I'm one of them. Fortunately, what we lack in $$$$, we make up for in hard work and talent!
)))
Tim.
P.S. Warmest regards to Katherine.

 

[JonnyT]

Is that nice but dim Tim?

PS you cannot trade without substantial risk capital.

JonnyT

 

[FTSE Beater]

FTSEBeater,

Surely you'd have to return 25% a month from £10k to make £30k a year (assuming no compounding)?

Hi Frugi

I always include compounding because I believe that risk (and therefore reward) should be directly linked to the amount of available trading capital. i.e. 2% risk maximum

HTH